Chapter - 7 Income under the Head "Capital Gains"

Transcription

1 Chapter - 7 Income under the Head "Capital Gains" Basis of Charge Section 45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA The following are the essential conditions for taxing capital gains: (A) there must be a capital asset; (B) the capital asset must have been transferred; (C) there must be profits or gains on such transfer, which will be known as capital gain; (D) such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA. Basis of Charge Capital Asset Transfer u/s 2(47) No Transfer u/ss 46 & 47 Capital Gain No Capital Gain Short Term (STCG) Long Term (LTCG) Capital asset Section 2(14) Capital asset means - property of any kind held by the assessee, whether or not connected with his business or profession, but does not include: (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession as these will be taxed under the head "profits and gains of business or profession"; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use: (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of 1

2 (iii) art. agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land; Types of capital asset Short Term Capital Asset Long Term Capital Asset Short-term capital asset [Section 2(42A)]: A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset. However, the following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer: (a) Shares held in a company. (b) Any other security listed in a recognised stock exchange in India. (c) Units of the Unit Trust of India or units of a Mutual Fund. (d) Zero coupon bond. The period of holding in the following five cases shall be determined as under: Case (i) Shares held in a company in liquidation (ii) Property acquired in any mode given under section 49(1) (e.g. by way of gift will, etc.) (iii) Shares in an Indian Amalgamated Company acquired in a scheme of Amalgamation (iv) Shares in Indian Resulting company acquired in case of demerger (v) (a) Trading or clearing rights of recognised stock exchange pursuant to its demutualisation or corporatisation (b) equity shares in a company acquired by a person pursuant to the demutualisation or corporatisation of recognised stock exchange Exclusion/Inclusion of period Exclude the period subsequent to the date of liquidation Include the holding period of previous owner also. Include the holding period of shares in the Amalgamating Company by the Assessee. Include the holding period of shares in the Demerged Company by the Assessee Include the period for which the person was a member of the recognised stock exchange in India Include the period for which the person was a member of the recognised stock exchange in India Holding period in case of shares or any other security [Explanation 1(i)(e) and (f)] The period of holding, in the following circumstances will be computed as under: 1. Right to subscribe to shares or any other securities (may be called as financial assets subscribed to by the assessee on The period shall be reckoned from the date of allotment of such financial asset. 2

3 the basis of right to subscribe to such financial assets. 2. Right to subscribe to share or any other securities acquired by a person in whose favour the right has been renounced by the existing holder. 3. Period of holding of the right by a person who has renounced the right. 4. Period of holding of a financial asset allotted without any payment and on the basis of holding of any other financial asset e.g. bonus shares. 5. Period of holding of specific security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at a concessional rate to his employees (including former employees) do The period shall be reckoned from the date of offer of such right by the company or institution to the date of renouncement, which in normal circumstances will be short-term. The period will be reckoned from the date of allotment of such financial asset (not from the date of allotment of the original shares). The period shall be reckoned from the date of allotment or transfer of such specific security or sweat equity share. Long-term capital asset [Section 2(29A)]: It means a capital asset which is not a short-term capital asset. Transfer Section 2(47) Transfer, in relation to capital asset, includes: (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or (v) the maturity or redemption of zero coupon bonds; or (vi) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or (vii) any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. Transactions not regarded as transfer Sections 46 and 47 In the following transactions although there is a transfer, but these are not considered to be transfer for purposes of capital gains: (i) where the assets of a company are distributed to its shareholders on liquidation of a company, such distribution shall not be regarded as transfer in the hands of the company. [Section 46] (ii) any distribution of capital assets on the total or partial partition of HUF (iii) any transfer of a capital asset under a gift or will or an irrevocable trust (iv) any transfer of a capital asset - by a company to its 100% subsidiary company or - by a wholly owned subsidiary to its holding company 3

4 - provided the transferee company is an Indian company (v) any transfer in a scheme of amalgamation if the amalgamated company is an Indian company (vi) any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company if (a) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholder of the amalgamated foreign company, and (b) such a transfer does not attract capital gains tax in the country, in which the amalgamating company is incorporated (vii) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company (viii) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank (ix) any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking (x) any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company (xi) any transfer of bonds or GDR of a public sector company purchased in foreign currency, made outside India by a non-resident to another non-resident (xii) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company or any transfer by way of conversion of foreign currency exchangeable bonds into shares or debentures of any company. (xiii) any transfer of a capital asset being land of a sick industrial company made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial company is being managed by its workers' co-operative. (xiv) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, provided the following conditions are satisfied: (a) all the assets and liabilities of the firm or AOP/BOI become the assets and liabilities of the company; (b) all the partners of the firm become the shareholders of the company in the same proportion of their capital ratio (c) the partners of the firm receive only shares in the company as consideration (d) partners have at least 50% shareholding/ voting power in the company at least for a period of 5 years from the date of the succession (xv) transfer of capital assets from a sole proprietary concern to the company in case of conversion provided conditions stated in above point are satisfied. It may be observed that the above transactions are not treated as transfer for purposes of capital gains. HOW TO COMPUTE CAPITAL GAINS Computation of Short-term Capital Gains Computation of Long-term Capital Gains Full value of consideration Less:(a) Expenditure incurred wholly and exclusively Full value of consideration Less:(a) Expenditure incurred wholly and exclusively 4

5 in connection with such a transfer ( b) Cost of acquisition (c) Cost of improvement Gross short-term capital gains Less: Exemption, if available, u/s 54B/54D/54G/54GA Taxable Short-term capital gains in connection with such a transfer (b) Indexed Cost of acquisition (c) Indexed Cost of improvement Long-term capital gains Less: Exemption if available u/s 54/54B/54D/54EC/ 54F/54G/54GA Taxable long-term capital gains Cost of acquisition Section 55(2) Cost of acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquisition of the asset. Expenses incurred for completing the title are a part of the cost of acquisition. Cost of acquisition in relation to goodwill of a business, tenancy rights, route permits, loom hours, right to carry on business, patents, copyright or trademark, it means: - - the amount of purchase price, if purchased - in any other case NIL Where such asset is acquired in a mode given under section 49(1), the purchase price of the previous owner shall be taken as the cost of acquisition. However, if it is self-generated by the previous owner, the cost of acquisition shall be taken as nil. Deemed cost of acquisition Cost to the previous owner [Section 49(1)]: Where the capital asset became the property of the assessee in any of the manner mentioned below, the cost of acquisition of the asset shall be deemed to be cost for which the previous owner of the property acquired it: (a) on the distribution of the assets on total/partial partition of Hindu Undivided Family; (b) under a gift or will; (c) by succession, inheritance or devolution; (d) on any distribution of assets on the liquidation of a company; (e) on a transfer to a revocable or irrevocable trust; (f) on a transfer by a wholly owned Indian subsidiary company to its holding company or vice versa; (g) on any transfer in a scheme of amalgamation of two Indian companies subject to certain conditions u/s 47(vi); (h) on any transfer in a scheme of amalgamation of two foreign companies subject to certain conditions; (i) on any transfer of a capital asset by the banking company to the banking institution in a scheme of amalgamation of a banking company with a banking institution; (j) on transfer in a business reorganization of a capital asset by the predecessor co-operative bank to the successor co-operative bank, (k) on conversion of self acquired property of a member of a Hindu Undivided Family to the joint family property. Cost of acquisition of assets acquired before [Section 55(2)(b)]: The assessee has an option to take either - the actual cost of acquisition or - the fair market value of the asset as on to be the cost of acquisition for computation of capital gains. Where the capital asset becomes the property of the assessee under the mode specified u/s 49(1) and the previous owner acquired the asset before , then cost of acquisition shall be deemed to be the higher of - the cost to the previous owner, or 5

6 - the fair market value of the asset as on The assessee cannot opt for fair market value as on , in case of goodwill of a business, trade mark, right to manufacture, etc. even if such asset is purchased by the assessee or the previous owner (if acquired in a mode given under section 49(1)) or if such asset is self-generated by the assessee or the previous owner. Summarized Table of cost of acquisition Sl. No. Type of Capital Asset Cost of acquisition to the assessee 1. Goodwill of a business, trademark or brand name associated with a business, right to manufacture or produce or process any article or thing or right to carry on any business or tenancy rights, State carriage permits or loom hours, if purchased or acquired from previous owner in a mode given under section 49(1). Amount of purchase price to the assessee or the previous owner (FMV on not allowed even if it acquired before ) 2. Same assets as above but self generated Nil (FMV on not allowed) 3(a) Allotment of additional Financial asset i.e. share or security Amount actually paid (b) Financial asset allotted without any payment Nil (but if acquired before F.M.V. as on allowed) 4. (a) Equity share(s) allotted to a shareholder on demutualisation or corporatisation of stock exchanges Cost of acquisition of his original membership of the stock exchange (b) Trading or clearing rights, acquired by shareholder mentioned in clause (a) above Nil 5. Any other asset becoming the property of the assessee before Capital asset becoming the property of the assessee in any of the modes specified in section 49(1) and it became the property of the previous owner before Capital asset becoming the property of the assessee on distribution by the company on liquidation provided capital gain tax has been assessed u/s 46(2). 8. Share or stock of company becoming assessee's property by consolidation, conversion, etc of shares or stock Cost of acquisition to the assessee or its F.M.V. as on at the option of the assessee Cost of acquisition to the previous owner or its F.M.V. as on at the option of the assessee F.M.V. of the asset on date of distribution Cost of acquisition calculated with reference to cost of acquisition of shares or stock from which asset is derived 9. Cost of shares of amalgamated company Cost of shares in amalgamating company 10. Cost of acquisition in the case of shares/debentures acquired on conversion of debentures 11. Cost of specified security or sweat equity share already treated as perquisites under section 17(2)(vi) [Section 49(2AA)] 12. Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)] Cost of the debenture/debenture stock/ deposit certificate The cost of acquisition of such security or share shall be the fair market value which has been taken into account for the purpose of valuation of perquisite. Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under section 56(2)(vii), the cost of acquisition of such property shall be deemed to be value which has been taken into account for section 56(2)(vii). Treatment of advance money received Section 51 If any advance money is forfeited by the assessee the amount so forfeited shall be deducted from the cost of acquisition or 6

7 FMV or WDV in case of depreciable assets. If the amount forfeited is more than the cost, then such excess is capital receipt. Hence, it is not taxable. If such an advance was received and retained by any previous owner, the same shall not be deducted from the cost of the asset. Cost of improvement Section 55(1)(b) Cost of improvement for Goodwill or right to manufacture, produce or process any article or thing or right to carry on any business of a business NIL Cost of improvement in relation to any other capital asset, (a) Capital expenditure incurred before NIL (b) Capital expenditure incurred on or after is treated as cost of improvement. Where the capital asset became the property of the assessee by any mode specified in section 49(1), capital expenditure incurred by the previous owner shall also be treated as cost of improvement. Indexed cost of acquisition/ improvement (Explanation (iii) to section 48) CII of the year of transfer Cost of acquisition CII of the year in which the asset is first held by the assessee CII of year of transfer Cost of improvement CII of the year in which the improvement was made by the assessee or previous owner. For calculating the long tern capital gain, indexation of cost of acquisition and improvement is to be made. However, Indexation of cost not allowed in following cases 1. Transfer of bonds and debentures other than capital indexed bonds issued by the Government. 2. Transfer of shares or debentures acquired by a non-resident in foreign currency in an Indian company. 3. Transfer of undertaking or division in a slump sale. 4. Transfer of units of Unit Trust of India or Mutual Fund covered u/s 10(23D) purchased in foreign currency by overseas financial organisation also known as Offshore funds. 5. Transfer of Global Depository Receipt or bonds of an Indian company or share or bonds of public sector company sold by the Government and purchased in foreign currency by a non-resident. 6. Transfer of Global Depository Receipt purchased in foreign currency by an individual resident in India and employee of an Indian company. 7. Transfer of securities by Foreign Institutional Investors. 8. Transfer of foreign exchange asset by a non-resident Indian Computation of capital gain in certain cases 1 Capital gain in case of amount received from an insurer on account of damage or destruction of any capital asset [Section 45(1A)]: Where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), 7

8 then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. 2 Capital gain on conversion of capital asset into stock-in-trade [Section 45(2)]: It is a transfer but capital gain on conversion of capital asset into stock-in-trade shall be chargeable to tax in previous year in which that stock-in-trade is sold or otherwise transferred by the assessee. The indexation of cost of acquisition/improvement is done upto the date of conversion. The fair market value of the asset, as on the date of such conversion, shall be deemed to be full value of the consideration of the asset. 3 Capital gain on transfer of capital asset by a partner/member to a firm/ AOP/BOI as capital contribution [Section 45(3)]: The profits or gains arising from the transfer of capital asset held by a person, to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year, in which such a transfer takes place and, for the purposes of computation of capital gain, in the hands of the partner/member, the amount recorded in the books of account of the firm, association or body of individuals for such capital asset shall be deemed to be the full value of the consideration. 4 Capital gain on transfer of a capital asset by way of distribution on the dissolution of a firm, AOP/BOI [Section 45(4)]: The capital gains from transfer by way of distribution of capital assets on dissolution of a firm or otherwise shall be chargeable to tax as the income of the firm in which such distribution takes place. The fair market value of the capital asset on the date of distribution shall be taken as the sale consideration. Distribution of stock in trade amongst partners at the time of dissolution Section 45(4) deals with distribution of capital assets at the time of dissolution. Stock in trade is not a capital asset and as such if stock in trade is distributed amongst the partners, then as per A.L.A. Firm v CIT (1991) 189 ITR 285 (SC) case, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the asset including the stock in trade only at real basis (i.e. market value) and not at cost or on their value appearing in the books of account. The settlement of accounts of the partners must be not on a notional basis but on a real basis. Thus, once the stock in trade is valued at market price, the surplus, if any, has to be taxed as business income of the firm. However, the Supreme Court in the case of Sakthi Trading Co. v CIT (2001) 250 ITR 871 (SC), observed that valuation of closing stock is to be done at the market value only when there was dissolution and also discontinuance of the business of the firm. But, where there is no discontinuance of the business, the closing stock should be valued at cost or market price whichever is lower. 5 Capital gain on transfer by way of compulsory acquisition of an asset [Section 45(5)]: Where a capital asset has been compulsorily acquired under any law, it will be treated as a transfer of the previous year in which the asset is compulsorily acquired. Indexation, if required, will be done till the previous year of compulsory acquisition. However, the capital gain will be taxable in the previous year in which the part or whole compensation is received. Subsequently if any enhanced compensation allowed by court or any other authority is also taxable in the year of receipt. The cost of acquisition and improvement in this case will be NIL. However, litigation expenses will be allowed as deduction. Where a right to receive the compensation is in dispute [Section 45(5)(c)]: Where the amount of the compensation or consideration is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the compensation or consideration received was taxed, shall be recomputed by the Assessing Officer accordingly. Hence, the capital gain shall be taxable even if the compensation amount is in dispute as the assessee shall be entitled to get the assessment amended if compensation is later on reduced. 8

9 6 Capital gains on purchase by company of its own shares or other specified securities [Section 46A]: In case of buy back of shares, the difference between the cost of acquisition of shares and consideration received from the company is taxable in the hands of the shareholder in the year of buy back. 7 Transfer of securities by depository [Section 45(2A)] Where any person had, at any time during previous year, any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository. The cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method. 8 Liquidation of a company Section 46 In the hands of company Distribution of assets to the shareholders is not regarded as transfer. Hence, no capital gain. In the hands of shareholders Any money or assets received by the shareholders in the case of liquidation of the company, it is taxable as capital gain. Sale consideration of shares shall be FMV of assets received on the date of distribution less deemed dividend under section 2(22)(e), if any. The period of holding shall be only upto the date of liquidation of the company. 9 Capital gain on transfer of depreciable assets Section 50 The capital gain is calculated under the following two cases: (I) Where entire block of depreciable assets is transferred i.e. the block ceases to exist: If the value of the consideration exceeds the aggregate of cost of acquisition and the expenses of transfer, there will be shortterm capital gain. On the other hand, if the value of the consideration of entire block transferred is less than the aggregate of cost of acquisition and expenses of transfer, there will be short-term capital loss; (II) Where part of the block of depreciable assets is transferred i.e. the block does not cease to exist: If the value of consideration exceeds the aggregate of cost of acquisition and expenses of transfer, there will be short-term capital gain. On the other hand, if the value of the consideration of the part transferred is less than the cost of acquisition, then the balance left is the WDV of the block at the end of the year on which depreciation will be charged as per section 32. In case of depreciable assets, cost of acquisition and cost of improvement is taken as the aggregate of the following: (a) WDV of the block of assets at the beginning of the year; and (b) actual cost of any asset falling within that block, acquired during the year. 10 Cost of acquisition and capital gain in case of depreciable assets of electricity companies [Section 50A]: Where the capital asset is an asset in respect of which an undertaking engaged in generation or generation and distribution of power has claimed depreciation at certain percentage on actual cost under section 32(1)(i), in any previous year, then for purpose of computing capital gain on such assets, the cost of acquisition shall be the actual cost at which the asset was acquired by such undertaking and it shall not be the written down value as adjusted, as is applicable for other assessee's. However, on such transfer, the difference between the actual cost and the WDV of such asset shall be balancing charge taxable under section 41(2). Further in this case, there can be long-term capital gains if the asset is held for more than 36 months. 11 Computation of capital gain in Slump Sale Section 50B Slump sale means a sale where the assessee transfers one or more undertaking as a whole including all the assets 9

10 and liabilities as a going concern without assigning value to the individual assets and liabilities. Slump Sale LTCG (if undertaking is owned by the assessee for more than 36 months) No indexation allowed STCG (in other cases) The cost of acquisition and cost of improvement shall be Net Worth of the undertaking. Net worth = Total value of assets of the undertaking Total liabilities appearing in the balance sheet Value of assets: for Depreciable assets Aggregate of WDV of each asset computed separately For Non-depreciable assets Book Value Certificate from a CA should be filled along with the return. 12 Computation of capital gains in real estate transactions Section 50C (1) Where the sale consideration on the transfer of land or building or both, is less than the value determined by the stamp valuation authority for payment of stamp duty in respect of such transfer, then value determined by the stamp valuation authority shall be deemed to be the sale consideration. (2) Where (a) the assessee claims before the AO that the value determined by the stamp valuation authority exceeds the fair market value of the property on the date of transfer and (b) the value so determined has not been disputed in any appeal before any other authority or court the AO may refer the case to valuation officer. (3) The value determined by Valuation officer shall not be taken if it exceeds the value determine by the stamp valuation authority. Capital gain in the case of transfer of shares debentures by non-residents Proviso 1 to section 48 and rule 115A As already discussed, in the case of long-term capital gain, the cost of acquisition and cost of improvement thereto are both indexed. However, in the case of an assessee who is a non-resident, any capital gain, whether short-term or long-term, arising from the transfer of a capital asset being shares/debentures of an Indian company, bought in foreign currency, shall be computed in the following manner and no indexation of cost will be done, even if it is a long-term capital gain: (a) cost of acquisition shall be converted into the foreign currency, which was initially utilised in the purchase of such shares/debentures. For the purpose of such a conversion, average rate of TT buying and TT selling, on the date of acquisition of such shares/debentures, shall be taken; (b) expenses of transfer will also be converted into the same foreign currency, which was initially utilised for acquisition of such shares/debentures. For the purpose of conversion average rate of TT buying and TT selling, on the date of transfer, shall be taken; (c) full value of consideration shall also be converted into the same foreign currency which was initially utilised for purchase of such shares/debentures. Here also the average rate of TT buying and TT selling of the foreign currency, on the date of sale, shall be taken; 10

11 (d) capital gain will now be computed as under: full value of consideration (converted into foreign currency at average TT buying and TT selling rate on date of sale) Less: (i) expenses on transfer(converted into foreign currency at average TT buying and TT selling rate on the date of sale) (ii) cost of acquisition(converted into foreign currency at average TT buying and TT selling rate on the date of ac quisition) Capital gain in foreign currency (e) the capital gain in foreign currency, which may be long-term or short-term, shall be converted into Indian rupees at the TT buying rate only (not the average rate) on the date of transfer of the capital asset. Exemption of long-term capital gains arising to non-resident Indian on transfer of 'foreign exchange asset' [Section 115F]: Where an assessee, who is a non-resident Indian, transfers any long-term foreign exchange asset (hereinafter called original asset), he can claim an exemption in respect of the long-term capital gains from such asset if the following condition is satisfied. He has invested within a period of six months after the date of such transfer, the whole or any part of the net consideration in any of the foreign exchange assets (hereinafter called new asset). 1. "Foreign exchange asset" means any of the following assets, namely: (a) Shares of an Indian company, (b) Debentures issued by an Indian company which is not a private company, (c) Deposit with an Indian public limited company, (d) Central Government securities, (e) National Savings Certificates VI and VII issue. 2. The above exemption is allowed only to non-resident Indian and not to any other non-resident in India. Quantum of deduction (i) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gains shall be exempt; (ii) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gains the same proportion as the cost of acquisition of the new asset bears to the net consideration, shall be exempt. In other words, it may be calculated as under: Amount invested Long-term Capital Gain Net consideration Withdrawal of exemption: The exemption granted u/s 115F will be withdrawn under the following circumstances: Where the new asset is transferred or converted into money within a period of 3 years from the date of its acquisition, the exemption granted, on the basis of cost of the new asset, shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which the new asset is transferred or converted into money and shall be taxed as long-term capital gains. Option not to avail of the provisions of section 115F [Section 115-I]: A non-resident Indian may elect not to be governed by the provisions of section 115F for any assessment year. In that case, he shall have to furnish his return of income for that assessment year u/s 139 and declare that the provisions of the section shall not apply to him. The total income of the non-resident for that assessment year shall be computed and tax on such total income shall be charged like other normal cases. Reference to Valuation Officer Section 55A With a view to ascertaining the fair market value of a capital asset for the purposes of computation of capital gain, the Assessing Officer may refer the valuation of capital assets to a Valuation Officer of the Income-tax Department under the following circumstances: 11

12 (a) in a case where the value of the asset, as claimed by the assessee, is in accordance with the estimate made by a registered valuer, and the Assessing Officer is of opinion that the value so claimed is less than its market value; (b) in case, the Assessing Officer is of opinion that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than 15% of the value of the asset or by more than Rs. 25,000 of the value claimed by the assessee; (c) where the Assessing Officer, having regard to the nature of the asset and other relevant circumstances, feels it is necessary to do so. Exemption of capital gains Exemption of capital gains on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Section 10(37)]: The capital gains arising to an individual or a Hindu undivided family from transfer of urban agricultural land shall be exempt if such land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such HUF. Transfer is by way of compulsory acquisition under any law. Compensation or enhanced compensation should be received on or after Exemption of long-term capital gain arising from sale of shares and units [Section 10(38)] Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt provided (a) - such equity shares are sold through recognised stock exchange, - whereas units of an equity oriented fund may either be sold though the recognised stock exchange or may be sold to the mutual fund. (b) such transaction is chargeable to securities transaction tax. Sec. Assessee to whom allowed 54 Individual/ HUF Exemption of capital gains under sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA Conditions to be satisfied 1. Transfer should be of a residential house income of which is chargeable under the head 'Income from house property'. 2. It must be a long-term capital asset. 3. Purchase of another residential house should be within one year before or 2 years after, or construction should be within 3 years after the date of transfer. 54B Individual 1. Transfer (excluding compulsory acquisition) should be of agricultural land. 2. It must have been used in the 2 years immediately preceding the date of transfer for agricultural purposes either by the assessee or his parent. 3. Another agricultural land should be purchased within 2 years after the date of transfer. 54D Any assessee which is an industrial undertaking 1. There must be compulsory acquisition. 2. The property compulsorily acquired should be land and building forming part of an industrial undertaking. Quantum of exemption Actual amount invested in new asset or the capital gain whichever is less. Actual amount invested in new asset or the capital gain whichever is less. do 12

13 Sec. Assessee to whom allowed Conditions to be satisfied 3. The asset must have been used in the 2 years immediately preceding the date of transfer of the assessee for the purpose of the business of the undertaking. 4. Within a period of 3 years after the date of compulsory acquisition any other land or building should be purchased or constructed for the use of existing or newly set up industrial undertaking. 54EC Any assessee 1. The asset transferred should be a long-term capital asset 2. Within a period of 6 months after the date of transfer, the capital gain must he invested in the specified assets i.e. bonds redeemable after 3 years issued on or after by NHAI & RECL 54F 54G Individual/ HUF Any assessee being an industrial undertaking 54GA Any assessee being an industrial undertaking Quantum of exemption Actual amount invested subject to maximum Rs. 50 lakhs in new asset or the capital gain whichever is less. 1. The asset transferred should be a long-term capital If the cost of the new asset, not being a residential house. residential house is not less 2. Within a period of 1 year before or 2 years after the than the net consideration date of transfer, a residential house should be then the whole of the capital purchased or constructed within a period of 3 years gain. Otherwise, LTCG Amt. invested after the date of transfer. Net consideration price 3. The assessee should not own more than one residential house on the date of transfer. 4. The assessee should not within a period of 2 years purchase or should not within a period of 3 years construct any residential house other than the new asset. 1. Machinery, plant, building, or land used for the If the cost of the new assets business of an industrial undertaking situated in an and expenses incurred for urban area should have been transferred. shifting are greater than the 2. Transfer should be due to shifting to any area other capital gain, the whole of than an urban area. such capital gain. 3. Within a period of 1 year before or 3 years after the Otherwise capital gain to date of transfer purchased machinery, plant or acquired the extent of the cost of the building or land or constructed building and new asset. completed shifting to the new area. 1. Machinery, plant, building, or land used for the If the cost of the new assets business of an industrial undertaking situated in an and expenses incurred for urban area should have been transferred. shifting are greater than the 2. Transfer should be due to shifting to any Special capital gain, the whole of Economic Zone whether developed in any urban area such capital gain. or any other area. Otherwise capital gain to 3. Within a period of 1 year before or 3 years after the the extent of the cost of the date of transfer purchased machinery, plant or acquired new asset. building or land or constructed building and completed shifting to the new area. 13

14 Capital Gain Scheme. If the new asset is not acquired under sections 54, 54B, 54D, 54F, 54G and 54GA or the full amount could not be invested upto the due date of furnishing the return of income, the assessee can deposit the desired amount under the Capital Gain Scheme on or before the due date of return and thus can acquire the asset within the stipulated time out of money withdrawn from such scheme at a later date. In the case of section 54EC the Capital Gain Scheme is not applicable. Consequences if the new asset acquired is transferred within 3 years of its acquisition Under sections 54, 54B, 54D, 54G and 54GA. For computation of new Capital Gain (which will be shortterm), the cost of acquisition of such new asset shall be reduced by the amount of Capital Gain exempt under sections 54, 54B, 54D, 54G and 54GA earlier. Under section 54F. Besides the new Capital Gain (which will be short-term), the Capital Gain exempt earlier under section 54F, shall be long-term capital gain of the previous year in which new asset is transferred. Under section 54EC. If such security acquired is converted into money or any loan is taken against such securities within 3 years, the Capital Gain exempt under sections 54EC/54ED for such securities earlier shall be long-term Capital Gain of the previous year in which such conversion takes place or the loan is taken. Consequences if the amount deposited in Capital Gain Scheme is not utilised within the stipulated time of 3 years (2 years in case of section 54B). The unutilised amount shall be Capital Gain (short-term or long-term depending upon original transfer) of the previous year in which such period has expired. However, in case of section 54F, proportionate amount shall be taxable. Tax on STCG in case of equity shares and units of equity oriented fund Section 111A Any income arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and the following conditions are fulfilled (a) the transaction of sale of such equity share or unit is entered into on or after ; (b) such transaction is chargeable to securities transaction tax; (c) such equity shares are transferred through a recognised stock exchange or such units are transferred through a recognised stock exchange or sold to the mutual fund the tax payable by the 15 % on short-term capital gains. No deduction under Chapter VI-A (sections 80C to 80U) shall be allowed from such income. Shifting to claim full exemption of total income is allowed only in case of resident individual or HUF. Tax on long term capital gains Section 112 Long-term capital gain is taxable at a special rate of 20% in case of all assessees whether resident or non-resident LTCG is calculated after deducting indexation of cost of acquisition & improvement from the consideration price. No deductions permissible under Chapter VI-A (i.e. sections 80C to 80U) from long-term capital gain. Shifting is allowed in case of resident. Tax on long-term capital gains from listed securities: Although the long-term capital gain is taxable at the special rate of 20% but the tax payable by the assessee on long-term capital gain from securities listed on any recognised stock exchange in India or units of UTI or Mutual Funds Covered under section 10(23D) and Zero Coupon Bonds shall be minimum of the following 2 amounts: 1. 20% on long-term capital gains computed after indexation of cost of such shares, securities, units or bonds or 2. 10% on long-term capital gains computed without indexation of its cost. 14